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Taiwan's Economy Outperforms China's For The First Time In 30 Years As Demand For Chips Rises

 Taiwan's economy grew by 2.98% in 2020 compared to a year earlier, early estimates from the island's statistics office showed on Friday: growth outpaced China's 2.3% expansion.

The last time Taiwan's economy grew faster than China was in 1990, when the island's 5.5% growth outpaced its giant neighbor's 3.9%, official data from both sides showed.

Strong exports from Taiwan, particularly semiconductors, helped offset the difficulties of the Covid-19 pandemic, said Angela Hsieh, an economist at British bank Barclays.

Taiwan unexpectedly became Asia's best-performing economy last year, overtaking China for the first time in 30 years.

It came as strong global demand for the island's technology exports outweighed the impact of the Covid-19 pandemic.

The Taiwanese economy grew 2.98% in 2020 compared to a year ago, early estimates from the island's statistics office showed on Friday.

It beat its central bank's 2.58% forecast and beat Vietnam's 2.9% growth. Some economists had predicted that Vietnam would be Asia's fastest growing economy in 2020.

Taiwan's expansion last year was also higher than China's 2.3% full annual growth in 2020. The island last outpaced its giant neighbor in 1990, when its 5.5% growth surpassed 3, 9% from China, showed official data from both sides.

Taiwan's Economy Outperforms China's For The First Time In 30 Years As Demand For Chips Rises

"2020 has been a record year for Taiwan, and we expect the star to continue to shine," Angela Hsieh, an economist at British bank Barclays, wrote in a report on Friday after Taiwan released the figures.

The strength of the island's exports in the second half of last year - particularly semiconductors - helped the economy "easily offset" any drag from the pandemic, Hsieh said. The economist raised her forecast for Taiwan's growth in 2021 by 1.2 percentage points to 5.2%, much higher than the official projection of 3.83%.

Taiwan has also been relatively successful in containing the spread of Covid-19, allowing its economy to avoid a strict lockdown experienced by others globally. As of Sunday, the island reported 911 confirmed infections and eight deaths, according to the Taiwan Centers for Disease Control.

Semiconductor domain

Taiwan is a powerhouse in the production of semiconductors, which are important components that power products from cars to computers to mobile phones.

Demand for chips increased globally as the pandemic forced people to spend more time indoors, as lockdowns led to a surge in sales of consumer electronics, such as laptops.

More recently, a global semiconductor shortage led several automakers, including American automaker Ford Motor and Japanese automaker Nissan Motor, to cut production at some of their plants.

Economists at research firm TS Lombard estimated that Taiwan and South Korea account for 83% of global processor chip production and 70% of memory chip production, meaning that the two eastern economies of Asia has a near monopoly status in both segments of the industry.

That dominance would allow Taiwan and South Korea "to tap into their greater strategic importance for economic and political gains" from the United States and China, its two main clients, economists said in a note on Friday.

"Taiwan and Korea are on the front lines of the confrontation between the United States and China, depending on China for growth, but on the United States as the guarantor of national security," they said.

For Taiwan, such "victories" have included arms sales from the United States and a lack of economic pressure from China, economists at TS Lombard said.

The Communist Party of China in Beijing claims that Taiwan, a democratic and autonomous island, is a runaway province that must rejoin the mainland. The CCP has never ruled Taiwan.

In the short term, China could become more dependent on Taiwan for semiconductors as it eliminates American suppliers, according to TS Lombard. Beijing aims to be self-reliant in the long term as tensions with the United States grow, but some analysts said China's ability to do so is still far behind.

"The elimination of US suppliers further increases dependence on the People's Republic of China of Taiwan and Korea," wrote the economists at TS Lombard.

"Such is mainland dependence on Taiwan that Beijing is unwilling to apply economic pressure to the island, but China has adopted 'gray zone' warfare tactics and even talked about military action, all while continuing to buy TSMC products." they added. , referring to the world's largest semiconductor foundry in Taiwan.

TSMC's shares in Taiwan jumped 60% last year as the coronavirus spread globally. The shares have continued to rise this year, rising 11.5% in January from the close of last year.

'Lonely growth engine'

It's a matter of time before mainland Chinese companies catch up with Taiwanese capabilities to produce high-tech electronic parts such as semiconductors, said Iris Pang, chief economist for Greater China at Dutch bank ING.

"In a few years, when mainland China begins to achieve self-sufficiency in advanced technology, it will not only not buy as much from Taiwan as before, but will also become Taiwan's main competitor in the global market," he wrote in a report from the Friday.

Until then, Taiwan's growth, driven by the "sole growth engine" of electronics exports, will likely continue into 2021, Pang added. He explained that the demand could come from automakers, as well as consumers updating their smartphones and computer equipment.

"All of this suggests that the market outlook for Taiwan's semiconductor manufacturers is bright this year," said the economist.

"So even if it can be said that Taiwan is too dependent on the electronics sector for economic growth, job opportunities and investment, this is less of a problem given that other economies cannot compete on capacity and technology."

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